As anyone with teenagers can attest, sometimes reason is simply not enough.

I suspect that anyone grappling with the implementation and assessment of the best-interests duty from The Corporations Act might experience a similar realisation.

Section 961B (1) of the Corporations Act sets out the core best-interests duty, a primary obligation that ambitiously requires the provider to “act in the best interests of the client in relation to the advice”. It’s a primary obligation because it provides the parameters for all future engagements and it’s ambitious because it is not a duty limited to the advice but also applies to any interaction “in relation to the advice”.

Section 961B (2), in contrast, is a statutory framework that provides a partial, and not terribly effective, defence against claims an adviser failed to act in a client’s best interests. By demonstrating compliance with the processes described as the steps for “safe harbour”, an adviser can try to dispute the claim that they contravened s961B (1).

(For those playing at home, the actual quality of the advice, which should be the focus of a licensee’s compliance arrangements, is addressed in Section 961G).

These positions seem to be widely understood and accepted. Unfortunately, an increasing number of licensees appear to use 961B (2) both to prove the provider’s compliance with the best-interests duty and to establish the actual quality of the advice provided.

Let’s be clear:

  • Compliance with 961B (2) does not prove that the adviser acted in the client’s best interests.
  • Compliance with 961B (2) does not prove the advice is appropriate for the client.
  • A provider’s advice processes may possibly support the assertion that it complied with the law, but they do not prove this.

So why are licensees using 961B (2) as the principal, and in some cases only, means of assessing compliance with the law?

In most cases, it’s simply a matter of convenience and consistency.

This explains why many compliance experts ignore the nuances of s961B (2) in favour of commercial interpretations. This is lazy and uninspired, particularly when one considers the facilitative and commercial character of the Corporations Act and the significant consequences of misunderstanding its requirements.

Let’s refresh our understanding of each of the requirements for safe harbour.

961B (2)(a): Identifying objectives and needs

In order to provide personal advice, an adviser must start by identifying the objectives, financial situation and needs disclosed to the adviser in the client’s instructions.

Your discovery process can be scaled according to your client’s needs, objectives and circumstances and your client can instruct you to provide, or not provide, specific services. The client is (notionally) in control, but as the advice professional, it is your responsibility to identify your clients’ relevant circumstances and test their instructions, particularly their understanding of the consequences and implications.

Advisers often confuse goals and objectives and record vague and generic information in their notes and advice documents. This is not in their interests nor is it in the interests of their clients.

961B (2)(b)(i): Identify the subject matter

In order to provide personal advice, an adviser must identify the subject matter of the advice that has been sought by the client (whether explicitly or implicitly). Where a client has complex or unclear needs, this may necessitate additional discussions.

A professional adviser is not simply an order taker. An adviser cannot, and should not, implement instructions that the adviser knows, or reasonably suspects, will deliver adverse, sub-optimal or trivial outcomes for their client. Likewise, they cannot limit themselves to their client’s explicit needs and requests. They must consider their client’s implicit needs and test their client’s assumptions and preferences.

961B (2)(b)(ii): Consider relevant aspects

After identifying the subject matter of the advice the client is after, an adviser must take into account those aspects of the client’s objectives, financial situation and needs that are relevant to the subject matter of the advice.

The emphasis on relevance, and the active duty to consider the client’s circumstances and needs, should translate into the methodical application of the adviser’s knowledge, experience and common sense to the client’s needs. Advisers should avoid the automatic assumption that certain matters are always relevant, or always irrelevant, and turn their mind to their client’s specific circumstances.

961B (2)(c): Make further enquiries

Advisers cannot rely solely on the client’s instructions. They must make further enquiries where it’s reasonably apparent that the information provided to them is incomplete or inaccurate. If after making enquiries, this situation is not resolved, the adviser must warn the client before providing advice, but disclosure does not reduce or diminish the adviser’s best-interests obligations.

In our experience, this is one of the most frequently omitted advice steps. An advice professional should think carefully about whether they have all the information they need to provide the advice or services requested.

If there are relevant or material gaps in the information they have, they must investigate.

If they investigate but still can’t obtain all the information they need (but consider it’s in their client’s best interests that they proceed) then they must warn their client – in clear and effective language – about the gaps and assumptions in the advice. They must also instruct their clients to consider their own circumstances (and the risks of implementing the advice) before they proceed to implementation.

961B (2)(d): Consider your capability

An adviser must, before providing advice, formally consider whether they have the expertise (experience, education and competency) to provide the advice requested. Where the adviser does not have the expertise, they should decline to provide advice.

It is unusual to see any adviser formally considering whether they have the knowledge, skill and capability to provide the advice their client wants. In our experience, most advisers rely on their authorisation to demonstrate their capability, but the safe harbour process requires the adviser to consider this issue formally before proceeding to provide advice.

961B (2)(e): Decide whether a product recommendation is reasonable

An adviser must recommend a financial product only if, after considering the subject matter of the advice sought, it is reasonable to do so.

This is a trap for new players. Before advisers launch into their replacement product research and disclosure mode, they need to ponder, analyse and record whether a product recommendation is needed to help their clients’ achieve their goals and objectives.

If the client’s existing arrangements are adequate and appropriate, or if their needs can be met without new financial products, then a replacement may not be reasonable. Practically, in our opinion, this seems to require advisers to analyse their clients’ existing products before they even contemplate their replacement.

961B (2)(e)(i): Investigate relevant products

Where an adviser thinks it is reasonable to recommend a financial product, the adviser must conduct a reasonable investigation into relevant options. An adviser is expected to exercise professional judgement in product selection.

An adviser is not required to investigate every product but does need to investigate actively, and reasonably, to identify products that are relevant to their client’s needs and reasonably likely to satisfy their objectives. This obligation is particularly important if the adviser has access only to a limited approved product list or an APL dominated by a range of products with conflicted remuneration.

961B (2)(e)(ii): Assess the information you’ve gathered

Where an adviser thinks it is reasonable to recommend a financial product, the adviser must assess the information gathered from their investigation.

Read. Consider. Think. A professional adviser does this routinely but the Corporations Act requires that it be done methodically, consistently and predictably. It also needs to be well documented.

961B (2)(f): Consider your client’s objectives, situation and needs

The client’s objectives, financial situation and needs must be the adviser’s paramount considerations, on which all judgements when advising the client are to be based.

This step requires the adviser to review their proposed recommendation and confirm that it is based on their objective, considered and impartial assessment of the client’s objectives, situation and needs. They should stop and think about whether, on balance, their proposed recommendation delivers what their client needs.

The safe harbour requirements include a number of steps on the way to a product recommendation. Think of these as mandatory rest breaks designed to reduce the risk of inappropriate advice.

961B (2)(g): Any other steps to champion your client’s interests

An adviser also needs to take any additional steps that would reasonably, and objectively, be regarded as in their client’s best interests. This requirement includes any steps that a person with a reasonable level of expertise in the subject matter would have taken if they had exercised care and objectively assessed their client’s relevant circumstances.

Accurate self-assessments of your capability aside, this is, in my opinion, the most problematic element of the steps for safe harbour.

Personally, I think it invalidates all the previous steps and should be eliminated but we understand equivocation well enough to appreciate the beauty of a vague, open and poorly defined ‘catch all’ provision.

In short, this last step states that an adviser must do whatever an objective expert would consider reasonable. Considering that financial planning is famous for its homogeneity and uniformity, this should be easy to anticipate.

Plaintiff lawyers, in particular, will have definite views on this requirement. If you’re confused, just remember to focus on the client’s best interests and repeat Dennis Denuto’s words from The Castle: “It’s the vibe of the thing, your honour.”

Finally, remember that although the statutory defences outlined in s961B (2) may suggest whether, or to what extent, an adviser has complied with s961B (1), the adviser’s substantive conduct is, in our view, the key determinant for assessing compliance with the best-interests duty. At most, the processes an adviser follows may suggest the advice was provided in the best interests of the client but they do not prove this.

Let’s hope your licensee’s approach doesn’t disadvantage you too much in the short term. Over the longer term, we hope that reason and the vibe will prevail.

Sean Graham is managing director of Assured Support.
Leave a comment